Illinois caps payday lending interest rates; why can’t we?

Every year at least one bill is introduced in the Washington State Legislature to cap payday lending rates somewhere short of the 391% annualized rate currently charged. And every year, due to a total lack of support by Republicans, and aggressive opposition from key, payday-industry-captive Democrats, the bill fails.

Payday loan predators have peddled consumer installment loans with interest rates which have averaged 341% in Illinois, but have also reached 1,000%. Under the new law, rates on consumer installment loans will be capped at 99% for loans $4,000 and less and 36% for loans greater than $4,000.

A few years ago, when a 99% top rate was floated here in WA as a compromise between the 391% currently charged and the 36% rate reformers had proposed, opponents screamed that it would be industry killer. Makes you wonder… if an industry can’t get by charging 99% interest, perhaps it shouldn’t exist?

Meanwhile, all reformers managed to squeeze out of the WA legislature was a law limiting customers to eight loans in a 12-month period, a measure intended to prevent borrowers from having their debt snowball indefinitely. Yet the industry quickly managed to run around even this modest reform.

You’d think Washington could do better in defense of some of our most vulnerable citizens.

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It’s been thirty years or more, but I remember when the top interest rate allowed in Washington State for unsecured loans was 12%. The limits were abolished among concerns expressed by Republicans that “the little guy” couldn’t get loans unless the interest rates were raised.

Of course, back then lending standerds WERE pretty strict. It took years before you could get your first credit card. Home loans requird an extensive credit and background history, plus a down-payment and closing costs which couldn’t be borrowed from relatives.

Unsatisfied with the 391% annual interest, it seems that payday lending companies are using overseas call centers to trick people into signing up for payday loans, calling them “funds you are entitled to as a U.S. taxpayer”.

For starters, Margarita Prentice (D-Renton) who is on the Ways and Means Committee, is in the tank for the payday loan industry. It pisses me off to no end to drive up Sunset Blvd. in the Renton Highlands and see a string of payday loan stores. They are a blighted eyesore that screams LOW INCOME NEIGHBORHOOD.

The thing about payday loan interest rates is that they aren’t actually 391%. I worked in the industry for a time, and here’s how it worked: we charged you 15% on your loan, period. So you could borrow $500 and you owed $575 in two weeks, or whenever your next payday was.

Now, suppose you didn’t pay us back on time, say you came in a week late and paid us back. How much do you owe? Still $575, or 15%. Say you come in a month late and pay us back… still $575. There were no late fees, in other words.

The 391% figure comes from taking a formula that is good for long-term debt, like the mortgages it was originally designed for, and applying it to short-term, 2 week loans. The fact is that you couldn’t pay 391% on the loan even if you tried. I had a guy pay me 15% on a ten-month-late loan once.

Sometimes people argue that individuals are effectively paying $390 per year if they take out a loan every two weeks. And that would be true, but they’re also effectively borrowing $13,000… they’re just doing it in $500 increments.

The real problem with payday loans is that companies will lend up to 50% of your paycheck, leaving you with only 50% of your next paycheck available to spend. If you couldn’t manage with 100%, how are you going to manage with 50%?

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